With demand for development space increasingly leading landlords to consider extending upwards, Bryan Johnston, Jane Miles and Emma Broad consider the key issues involved when adding new floors to existing buildings
Upward development, the construction of additional storeys on top of existing buildings, has always been one option for developers to maximise their returns by intensifying existing land use.
More recently this type of development has been viewed as an innovative response to the current housing crisis and shortage of development land. Such potential has not escaped the notice of the Department for Communities and Local Government and the Greater London Authority, which recently held a joint consultation looking at ways to streamline the planning process to encourage upward development in London.
However, while there has been some consideration as to how to improve the planning process to encourage this type of development, planning is only one of a number of matters that a developer should consider if it is going to make a success of any scheme to extend upwards.
Do you have the right to build into the airspace?
There is a presumption that ownership of land includes the airspace immediately above to the extent necessary for its ordinary use and reasonable enjoyment. However, where a building is tenanted and the landlord wishes to extend upwards, it will be necessary to check that the airspace has not (either deliberately or accidentally) been demised to one of the tenants.
While each case will turn on its own facts, the Court of Appeal decisions in Davies v Yadegar [1990] 1 EGLR 71 and Haines v Florensa [1990] 1 EGLR 73 will be of interest. In both cases (which concerned tenant alterations and the application of the Landlord and Tenant Act 1927) the court held that, as the relevant letting documents specifically demised the roof, the demise extended to the airspace above.
If the airspace has been let to a tenant, a landlord will be prevented from extending upwards during the term of the lease.
Are you committing a criminal offence?
It is a criminal offence to dispose of any premises to which Part I of the Landlord and Tenant Act 1987 (“the 1987 Act”)applies without first offering them to the qualifying tenants pursuant to the procedure set out in section 5 of the 1987 Act. Further, should a disposal occur in breach of the 1987 Act, the qualifying tenants may have (among other things) the right to compel the buyer to convey the premises to a nominated purchaser on the terms, including price, of the offending disposal irrespective of whether the premises have increased in value in the interim.
The relevance of the 1987 Act to upward extensions is starkly illustrated by Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch); [2008] 2 EGLR 141.
In Dartmouth a landlord granted a lease of (among other things) airspace above an existing block of flats. The intention was to facilitate upward development to create additional flats. The critical question was whether or not the airspace formed part of the premises to which Part I of the 1987 Act applied. Warren J concluded that the airspace was appurtenant to the building and the letting was therefore a disposal of premises to which the 1987 Act applied. As such the landlord should have complied with the procedure set out in section 5 of the 1987 Act.
A related consideration is that tenants of a building may have statutory rights to compulsorily acquire the freehold, which, if exercised, would allow them to take control of the building, including any proposed development.
Will there be interference with any rights to light?
Developers should take advice on rights to light early on in any development, particularly those involving upward extensions. This is because aggrieved parties whose rights to light have been or will be infringed by the proposed building works can seek or threaten injunctions unless they receive large compensation payments for giving up those rights and allowing development to proceed.
While local authorities have a statutory power under section 237 of the Town and Country Planning Act 1990 to override private rights to light (converting them into a claim for compensation only) there is no guarantee that those rights will be invoked in any given case; consequently there is a risk that they could be used as a form of “ransom strip” to frustrate development.
Are there sufficient reservations in the tenancy documents to allow the works to proceed?
Where a property is tenanted the underlying letting documents should be reviewed to check that sufficient rights are reserved to the landlord to allow the development to proceed.
Key considerations when looking at reservations include:
- Whether there are any reservations that are relevant to the proposed works.
- Whether a reservation allowing landlord’s development works relates to works to the building of which the premises form part or is restricted to neighbouring land.
- Where work requires access or alterations to the demised premises, whether the same is permitted by the reservations.
- The interplay between the reservations and the landlord’s covenants for quiet enjoyment and non-derogation from grant. The recent decision in Timothy Taylor Ltd v Mayfair House Corporation and another [2016] EWHC 1075 (Ch);
[2016] PLSCS 136 illustrates that even a widely worded reservation permitting a landlord to undertake works will be qualified by the quiet enjoyment/non-derogation covenants so as to require the landlord to take all reasonable steps to mitigate the impact of the works on the tenant. Depending on the nature of the works, a landlord may well have to consider compensating its tenant for disturbance caused, even where the landlord has the right to carry out the works.
What construction issues need to be considered during the build?
The key construction risks to be considered are:
- Who will take responsibility for the design and construction interface between the existing structure and the new development works? Unless the risk is expressly stated to sit with the building contractor, the building contractor will be entitled to an extension of time and/or loss and expense under the building contract if it transpires that the design is not compatible with the existing structure and that additional works or a different methodology has to be adopted in order for the contractor to complete the works.
- The impact of the works on existing tenants. Aside from taking the practical step of agreeing suitable working
methods, a clause should be inserted in the building contract obliging the contractor to take all reasonably practicable precautions to prevent any public or private nuisance. The landlord may also consider instructing the contractor to comply with periods of “quiet working”, as well as stipulating express noise/vibration level restrictions, how and when the site can be accessed,
and where materials and goods can be stored. - Who should insure? JCT building contracts assume that the landlord will insure both the existing structure and the works in the joint names of the landlord and the contractor (ie Option C insurance). An alternative (which would require specific drafting) would be for the contractor to maintain a joint-names policy for the works (ie all-risks insurance) with the landlord insuring the existing structure in his sole name (and the contractor would then rely on its own third party liability cover should it damage the existing structure).
What is the impact on the long-term management of the building?
The impact on the long-term management of the extended building should not be overlooked, for example:
- How will any existing service charge regime and/or landlord covenants operate in relation to the extended building? If the landlord retains responsibility for the structure, how, if at all, will it recover the cost of repairing the structure of the additional floors from the existing tenants?
- Is there sufficient capacity from existing utility connections to service the extended building?
- How will the landlord maintain the goodwill of its existing tenants while the works are being undertaken?
What warranties or guarantees can be given to tenants of the completed development?
Structural and/or new-build guarantee providers (such as NHBC) generally only grant a guarantee for additional floors if they also have control of the guarantee for the rest of the building. Indeed, cover for an upward development is provided not on a “new-build” basis but by way of an extension to the existing policy for the remainder of the building. Clearly, if the remainder of the building is without NHBC cover (or equivalent), no guarantee will be available for the occupiers of the new floors.
In high-value cases the developer should consider procuring collateral warranties from the building contractor and professional team to ensure any tenant under a full repairing lease has an appropriate means of recourse should a latent defect occur. The availability of a suite of collateral warranties will benefit the property’s marketability.
Weighing up the pros and cons
It is clear that construction of extra storeys on top of an existing building can bring with it an extra layer of issues. However, if done properly, upward development offers a rare opportunity to create additional floorspace literally out of thin air.
Accordingly, at a time when development land in places such as London is in short supply but the demand for homes seems to be at an all-time high, the difficulties of upward development may well be outweighed by the benefits. Where there is a chronic lack of space to expand outwards, for canny developers it may well be the case that onwards is upwards.
Bryan Johnston is a property litigation partner, Jane Miles is a construction and engineering managing associate, and Emma Broad is a real estate professional support lawyer at Dentons
